The events of this year have shone a light on the economic and societal inequalities both within and between nations and have forced global leaders to respond with speed to unprecedented incidents.
Alongside what has been a difficult year for many, there have been some positives slowly emerging. Global leaders have signalled an intention to ‘build back better’ and the notion of a green recovery is on the agenda for some major nations.
The COVID-19 vaccine progress, and subsequent regulatory approval in some countries, has strengthened confidence in an economic recovery in the coming year. The UN Climate Change Conference, COP26, has been postponed and will now be held in Glasgow, Scotland in November 2021. The deadline for countries to submit updated Nationally Determined Contributions (NDCs) is 31st December 2020, and we have seen a number published. While many countries will miss the deadline, they are encouraged to submit early next year so the NDCs can be analysed well ahead of COP26. It is an important opportunity for nations to come together to review commitments and strengthen the Paris Agreement ambitions.
Tackling climate change
During the year, more national and state governments have announced commitments to meet net zero carbon emissions. This includes Hungary, Japan and South Korea by 2050 and China by 2060.[1] Countries are also starting to announce the introduction of mandatory reporting against the Taskforce on Climate-related Financial Disclosures (TCFD). New Zealand was the first to announce the implementation of the requirements, from 2023, which are expected to cover approximately 90% of assets under management.[2] The UK declared mandatory climate disclosures for large companies and financial services by 2025 alongside its announcement of a Green Gilt.[3]
The impact bond market: growing and diversifying
The impact bond market continues to grow rapidly. Over US$500bn[4] of green, social and sustainability bonds have been issued in 2020, which surpassed last year’s issuance of just over US$320bn[5], leaving over approximately US$1trn outstanding. With this growth came increasing liquidity, diversity and a change in composition. Issuers are coming to market in a wider range of currencies and yield curves are filling out. While the euro and US dollar remain the most popular currencies, Yen issuance has increased significantly this year. 2020 saw an increase in sector representation, with green bonds from auto manufacturers and pulp and paper companies. The Volvo Car green bond passed our verification process and has been purchased in a number of our portfolios.
The impact bond market has historically been dominated by green issuance. During 2020, social and sustainability bonds have become a much larger proportion of the market, which has been in part a response to the global pandemic. Both governments and corporates have issued COVID-19 bonds to finance broader initiatives and we were a signatory to the investor statement on coronavirus response.
The EU commenced the issuance of their EU ‘SURE’ social bonds programme in Q3 with a €17bn[6] transaction. This issuance is part of a target to issue up to €100bn in social bonds[7] to combat the impacts of COVID-19 in EU member States. Given the size, the issuance programme will significantly contribute to the level of social issuance and further increase social bonds as a proportion of the impact bond market. We also invested in the African Development Bank “Fight COVID-19” social bond, a US$3bn COVID bond issued in March.
The number of sovereign issuers was a notable feature this year. New entrants to the market included Ecuador, Chile, Hungry, Indonesia, Sweden, Germany, Luxembourg, Mexico and Egypt and we expect further new entrants in the coming year. In January, Ecuador launched the first sovereign social bond and in March the German government introduced the concept of a “green twin”, a green bond issued with the same maturity and coupon as a conventional bond. Sovereign issuance benefits the impact bond market by expanding liquidity, providing a reference curve and encouraging other new issuers. We encourage sovereign issuance and recently signed an investor letter calling the UK to issue a Green Gilt.
Our SPECTRUM® review process involves engagement with issuers, from meetings before issuance, assessment on issue, through to follow-up during our annual impact reporting cycle. For a sovereign, for example, the responsible issuer analysis examines the policies, programmes and performance of the sovereign in environmental, social and governance matters, before the framework could be included in the investable universe
There has been an increase in sustainability-linked (SLB) and transition labelled bonds this year. Sustainability-linked bonds are not currently included in the investable universe because they are general purpose bonds, without a defined use of proceeds, and so far the key performance indicators to which they are linked have not been ambitious or comprehensive enough.
We support the concept of transition-labelled bonds and encourage issuers to match their ambitions with transparent and verifiable strategies and targets. It is imperative that issuers demonstrate a clear pathway to align their business with the Paris Agreement. As many issuers strive to transition their businesses, we expect transition-labelled bonds will be an ongoing feature of the impact bond market. We welcomed the release of ICMA’s Climate Transition Guidance and will continue to engage with issuers as they develop new bond frameworks and come to market.
Our business update
It has been an exciting year for us.
We have continued to strengthen our team with new members: Richard Petit, who joined our Credit team, Daniel Kricheff, Patrizio Trapletti and George Barnard, who joined our Sustainability team, and Mitsuo Kojima, who joined our Japan office.
We bid farewell to Maria De Filippo and Alya Kayal and thank them for their contribution to AIM over the years.
Strategic partnership announced
In July we announced a strategic partnership with Sumitomo Mitsuo Financial Group Inc. (“SMFG”), which was approved by the FCA in October. The strategic alliance includes distribution of funds to the Sumitomo Mitsui Banking Corporations (“SMBC”) group clients in Japan and an agreement to share AIM’s impact investing and sustainability expertise and knowledge. Since AIM’s foundation in 2014, our mission has been to mobilise mainstream capital to address the major challenges the world faces. The strategic alliance with SMBC group, the 14th largest bank globally, will allow us to continue to expand the depth of our impact expertise and investment capabilities across its portfolio management, verification, operations and distribution teams. This will enable us to continue to be world leading in impact fixed income investing and deliver strong financial and impact outcomes for clients.
Client growth
As of November, we manage over US$1bn of assets on behalf of clients globally. We are thrilled to reach this significant milestone. We believe this is testament to the strength of our relationship with our clients, the robustness of our process and the increasing demand for impact fixed income portfolios.
We strive for excellence and work hard to continue to develop our expertise and engagement with investors, issuers and other key contributors to the impact bond market. We are honoured to be recognised as world leading, receiving awards such as ‘Best ESG Investment Fund: Green bonds’ at the ESG Investing Awards and ‘Best Sustainability Reporting by an asset manager, medium and small (fixed income)’ at the Environmental Finance Sustainable Investment Awards. We were also runner up at the ESG Investing Awards for ‘Most Innovative ESG Initiative’ for our work on assessing the physical risks of green bonds.
We are also delighted to have received an A+ rating from the Principles for Responsible Investment (“PRI”), the highest rating that can be achieved. Responsible investment is integral to everything we do and so we are especially proud to have received an A+ for all PRI modules.
Sustainability is crucial not only in the management of our portfolios but in all aspects of our business.We have made solid progress across our four key pillars: our people, our clients, our climate and our community. We have implemented industry-leading parental leave policies which were put into effect this year. This includes 26 weeks full pay, for both women and men. Our managing partners have also continued their charitable donations over the course of the year.
Annual Impact Reports
Our 2019 annual Impact Reports were published in July. We achieved over 90% coverage ratios across our portfolios, despite initial concerns that the pandemic may reduce coverage. We continue to build on the transparency and depth of our reporting. This year we expanded our impact reporting to include TCFD-aligned reporting on carbon metrics and physical risk analysis.
In 2019 we partnered with South Pole to publish a pilot case study, Assessing Physical Risks of Green Bonds, as part of our continued commitment to pioneering best practice in impact bond verification, measurement and reporting. In our 2019 Impact Reports, we extended this work to roll out the South Pole physical risk assessment across all our portfolios. We reported on four global warming scenarios to better understand the climate risk profile of our investments. We drew two main conclusions from our results. Firstly, while there is a high level of variation in physical risk under each of the warming scenarios, the risk increases greatly in scenarios of +2°C of warming, and, secondly, there is a high level of variation among issuers. This analysis is a first step to better understanding physical risk in the impact bond space and provides an important engagement channel with issuers. Alongside assessing the physical risk, it is imperative to also analyse what issuers are doing to adapt to the expected risks. We began work on this area with South Pole this year and are working to extend this analysis in 2021.
In our Impact Reports we also expanded our carbon reporting to include TCFD-recommended carbon metrics for asset managers. This supplements our climate mitigation impact disclosure, which reports on the carbon savings associated with our investments following the Carbon Yield® methodology. Each year we will expand our engagement, TCFD-aligned climate disclosure and our TCFD reporting.
Collaboration with industry peers
We continue to actively collaborate with global sustainability experts to support collective action. We believe industry collaboration and education is critical to grow the impact bond market with integrity. Throughout the year we have presented at several conferences, such as the SEB conference regarding COVID recovery, the Climate Risk virtual conference organised by ESG investing, the panel debate organised by Swedbank on investing in a 1.5°C world, and the recent conference organised by Responsible Investment Association Australasia (RIAA). We have also provided expertise to the Inter-American Development Bank for the creation of the Green Bond Transparency Platform and contributed to reporting standards, including the early adoption of the Sustainability Reporting Standards for Social Housing.
The year ahead
We believe that the impact bond market will grow further as issuers seek funding for solutions to expand their business or investment in society in a manner which combats the environmental and social challenges we face. We look forward to continuing to manage portfolios on behalf of our clients, engaging with issuers and collaborating with industry peers. In the coming year we will continue to work with our partners, including SMBC Group, and invest in our people and capabilities. We look forward to continuing to engage with you and thank you for your support during the year.
AIM Team
[1] Source: https://www.nsenergybusiness.com/news/countries-net-zero-emissions/
[2] Source: https://www.responsible-investor.com/articles/new-zealand-becomes-world-s-first-country-to-introduce-mandatory-tcfd-disclosure#:~:text=Around%2090%25%20of%20New%20Zealand’s,to%20make%20the%20framework%20mandatory.
[3] Source: https://www.theguardian.com/environment/2020/nov/09/uk-to-make-climate-risk-reports-mandatory-for-large-companies
[4] Source: Bloomberg NEF. As at 30 November 2020.
[5] Source: Bloomberg NEF. As at 31 December 2019.
[6] Source: https://ec.europa.eu/commission/presscorner/detail/en/IP_20_1954
[7] Source: https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1808